‘Bar­baric’ buy­outs

Reg­u­la­tor slashes in­sur­ers’ sales to rein in risks of lever­aged ac­qui­si­tions

China Daily (Hong Kong) - - FRONT PAGE - By LI XIANG lix­i­ang@chi­nadaily.com.cn

Shares of Chi­nese com­pa­nies in­volved in lever­aged ac­qui­si­tions plunged on Monday, af­ter the coun­try’s top se­cu­ri­ties reg­u­la­tor con­demned the “bar­baric” buy­outs of listed com­pa­nies by spec­u­la­tive cap­i­tal.

Gree Elec­tric Ap­pli­ances, the coun­try’s big­gest air con­di­tioner pro­ducer, tum­bled by the 10 per­cent daily trad­ing limit, while China State Con­struc­tion En­gi­neer­ing Corp, the coun­try’s big­gest con­struc­tion com­pany, suffered a 9.15 per­cent loss. Both com­pa­nies have been among the tar­gets of the lat­est stake-buy­ing spree by ag­gres­sive and cash-rich in­sur­ance funds in the eq­uity mar­ket.

To rein in the risks as­so­ci­ated with the surge of ag­gres­sive buy­outs by in­sur­ance funds, China’s in­sur­ance reg­u­la­tor sus­pended on Monday the sales of new uni­ver­sal life in­sur­ance poli­cies by Fore­sea Life In­sur­ance Co, the in­sur­ance arm of pri­vate con­glom­er­ate Bao­neng Group, which is known for its ag­gres­sive pur­chase of China Vanke Co’s shares in the public mar­ket, which re­sulted in a power strug­gle within the de­vel­oper.

The reg­u­la­tor said in a state­ment on its web­site that it has sus­pended on­line sales of in­sur­ance prod­ucts from six ma­jor in­sur­ers, adding that it will closely fol­low de­vel­op­ments in the mar­ket and will take ad­di­tional reg­u­la­tory mea­sures if nec­es­sary.

It was the lat­est move by the reg­u­la­tor to adopt tighter con­trol of stock in­vest­ments by in­sur­ance funds and to curb the risks in deals us­ing cap­i­tal raised from high­yield­ing and short-term in­sur­ance prod­ucts.

Chi­nese me­dia re­ports cited un­named sources in the in­dus­try say­ing that the se­cu­ri­ties reg­u­la­tor has col­lected ev­i­dence of il­le­gal in­sur­ance

The com­ments ... (are) aim­ing at the spec­u­la­tive use of cap­i­tal that may have been sourced in­ap­pro­pri­ately.” Hong Hao, chief strate­gist at BOCOM In­ter­na­tional

funds used in some buy­out deals.

Liu Shiyu, chair­man of the China Se­cu­ri­ties Reg­u­la­tory Com­mis­sion, lashed out at the lever­aged buy­outs of listed com­pa­nies, dur­ing a fi­nan­cial in­dus­try meet­ing over the week­end. He called some in­sti­tu­tions “bar­bar­ians at the gate” and “rob­bers of the in­dus­try” who have chal­lenged the bot­tom line of the coun­try’s le­gal and fi­nan­cial sys­tem.

The se­cu­ri­ties chief ques­tioned the source of their cap­i­tal, say­ing that the use of “im­prop­erly ob­tained” cap­i­tal for lever­aged trad­ing is “un­ac­cept­able”.

The com­ment from the top reg­u­la­tor caught the stock mar­ket by sur­prise, prompt­ing in­vestors to sell their hold­ings on Monday.

“The com­ments are sur­pris­ingly harsh, but with good in­ten­tion to pro­tect smaller share­hold­ers. It is aim­ing at the spec­u­la­tive use of cap­i­tal that may have been sourced in­ap­pro­pri­ately,” said Hong Hao, chief strate­gist at BOCOM In­ter­na­tional in Hong Kong.

Hong said that the po­ten­tial tight­en­ing of con­trol by the reg­u­la­tors on the open mar­ket pur­chase of listed com­pa­nies will mean less sup­port for the share prices, which could in turn pressure the over­all A-share mar­ket.

The bench­mark Shang­hai Com­pos­ite In­dex fell by 1.2 per­cent on Monday as mar­ket sen­ti­ment wors­ened af­ter Italy re­jected a con­sti­tu­tional ref­er­en­dum.

The lat­est wave of con­tro­ver­sial pur­chases of listed com­pa­nies’ stakes by in­sur­ance funds “have helped fan the spec­u­la­tive mood in the mar­ket, which is harm­ful for the cap­i­tal mar­ket’s longterm and healthy de­vel­op­ment”, said Zheng Min­gang, an an­a­lyst at Dongx­ing Se­cu­ri­ties.

SHEN QILAI / BLOOMBERG

A man uses a smart­phone next to a map show­ing listed com­pa­nies at the Shen­zhen Stock Ex­change across the coun­try. The na­tion’s reg­u­la­tors have tight­ened its con­trol of stock in­vest­ments by in­sur­ance funds to curb the risks in deals us­ing cap­i­tal raised from high­yield­ing and short-term in­sur­ance prod­ucts.

SHEN QILAI / BLOOMBERG

The po­ten­tial tight­en­ing of con­trol by the reg­u­la­tors on the open mar­ket pur­chase of listed com­pa­nies will mean less sup­port for the share prices, ex­perts say.

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